Low rates drag on

Savers must move their money regularly to ensure they get the best deals, while borrowers will continue to benefit from the historically low Bank of England base rate, reports Sylvia Morris

With the UK economy still weak, some leading economists expect the Bank of England base rate to remain at 0.5 per cent during 2010 and beyond.

A poll by Reuters of 60 analysts, taken at the beginning of December 2009, found little expectation of a base rate rise until the fourth quarter of 2010. If it does rise, the analysts believed it will only rise to 1 per cent.

The latest forecast from the respected Centre for Economics and Business Research suggests the base rate could remain at 0.5 per cent well into 2011.

Jonathan Loynes, chief European economist at Capital Economics, says: ‘There are no signs of the base rate changing. We expect it to stay at 0.5 per cent until the end of 2010 and even as far as the end of 2011.’

Howard Archer, chief European and UK economist at forecasters IHS Global Insight, agrees, as he sees the UK struggling to get out of recession: ‘Given that a significant, sustainable recovery remains far from certain, we expect interest rates to stay down at 0.5 per cent until at least late 2010 and possibly beyond’.

Professor Peter Spencer from management consultant Ernst & Young’s ITEM Club adds: ‘The Bank rate is going nowhere. It will stay at 0.5 per cent for the foreseeable future.’

Faced with continuing low interest rates, savers need to ensure they are earning the best possible rate on their money by switching accounts regularly rather than sticking with the same one.

There is a huge difference between the best and worst rates. Banks and building societies are launching new accounts to attract new money while paying a pittance on older accounts.

More than 100 variable-rate accounts sporting high headline rates were launched in 2009. New easy-
access accounts have been offering 3 per cent before tax – the equivalent to six times the base rate – but they are often boosted by a bonus and your rate will plummet when this runs out.

Little interest
If you stay put in an older account, you could end up earning just 0.1 per cent before tax, which works out at as little as £10 interest on £10,000.

The same holds true for cash Isas. In 2008, you could have earned more than £500 interest for £10,000 on deposit. In 2009, this plummeted to as little as £55 with the loss of the short-term bonus and falling interest rates.

David Black, a banking expert at data analyst Defaqto, suggests you take the active approach: ‘If you have been in an account for years you will do better to close it and open a new one.’

You also need to ensure you pick the top fixed rates. Some banks and building societies will pay 4.25 per cent before tax, fixed for two years. Others pay as little as 3.5 per cent.

Loynes says: ‘We expect to see more good short-term fixed rate deals. The wholesale markets are by no means back to normal so banks and building societies are looking to savers.’